Banco Santander Chile (BSAC) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first quarter 2012 Banco Santander-Chile earnings conference call. My name is Feb and I'll be your operator for today.

At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Raimundo Monge, Corporate Director of Strategic Planning. Please proceed.

Thank you very much and good morning, ladies and gentlemen. Welcome to Banco Santander-Chile's first quarter 2012 results conference call. My name is Raimundo Monge and I'm joined today by Robert Moreno, Manager of Investor Relations.

Thank you for attending today's conference call in which we will discuss our performance in the first Q of 2012. Following the webcast presentation, we will be happy to answer you your questions.

During the first quarter of '12, market conditions improved, especially on the international front while the Chilean economy continued to show positive growth and employment figures. As a result, we have improved our GDP forecast outlook for this year to 4.5% and to 5% in 2013 with continued growth in private consumption, investment and employment been lowered and controlled level of risk of inflation. These should also lead to a short term interest rate outlook for the rest of the year.

In all, we expect a fairly supportive environment for banking activities, which lead us to be more optimistic compared to our more defensive stance during the second half of 2011. As a consequence of this improvement for outlook we have also increased our forecast for loan growth for the financial system to 11% up to 13% nominal growth for this year and to between 13% and 15% growth in 2013.

Given the supportive business environment, we have now altered our general strategy for the next two years. We remain committed to deepening our focus on retail banking by strengthening client relationship with the sound growth of our balance sheet and solid levels of capital and liquidity. At the same time, we will continue expanding our business while improving efficiency through productivity gains and manage risks conservatively. All of these effort with a goal of sustained high growth rate and sustainable ROEs.

In line with this strategic approach, in the first Q of 2012, results and profitability continue to improve. Net income attributable to shareholders totaled CLP118 billion, increasing 15.8% compared to fourth Q '11 and 1.7% compared to 1 Q '11. During the quarter the Bank saw improvement Q-on-Q in revenue generation efficiency and profitability.

The Bank's return on average or ROAE reached -- sorry, the Bank return on equity or ROAE reached a solid pre-dividend level of 23.4%. Excluding our annual dividend paid in April the ROAE was 24.4%, among the highest in the Chilean banking system. This strong level of profitability has been attained without our over-leveraging the Bank's balance sheet.

We ended the quarter with a Basel ratio of 14.8% and a core capital ratio of 11.2%, the highest among our main peers in Chile. Notable is the fact that we have not issued new shares in over 10 years. These give us what we believe is the best relationship between risk and return in the Chilean banking industry as measured by our ROE and capital ratios.

Let it be said that if we were to leverage the Bank to similar levels compared to our peers, then our ROE would be close to 30%. This high level of capital will allow us to grow without requiring new capital in the medium term, and we think we are in a good position to face any changes in Chile's capital requirements coming in the next few years.

Our high capital level and high internal generation of profit also allowed the Bank to continue paying an attractive dividend of 60% of 2011 profits in April, which represented a dividend yield of 3.5%. Regarding deposits and liquidity, in the quarter the Bank continued to improve its funding mix. The Bank maintained solid liquidity levels with our structural liquidity position currently at around $3 billion. That is more than twice our historical levels.

It is important to state that since the U.S.-owned and international financial markets showed greater stability in the quarter, we therefore lessened our surplus liquidity and improve our asset mix. We did this by lowering our cash and short term Central Bank deposit and increasing our loan book. At the same time we prepaid more expensive institutional type deposits and correspondent banking lines while continue to strongly increase our core deposit base with clients.

For these reasons, non-interest bearing demand deposits increased 3.5% and time deposit decreased 1.1% Q-on-Q with a falling institutional deposit and a 2.8% Q-on-Q rise in cheaper core client deposits. As of March 2012, our core deposit represented 78% of total deposits, rising from 69.8% as of March 2011.

In the first Q of 2012, total loans increased 2.6% Q-on-Q and 6.1% year-on-year. Loan growth was driven by the favorable evolution of Chilean economy following the Bank's cautious approach to loan growth in the second half of 2011. Loans to individuals which includes consumer mortgage and commercial loans to individuals increased 0.9% Q-on-Q in the first quarter of 2012.

By product, consumer loans increased 0.7% and residential mortgage loans increased 0.9% Q-on-Q. Lending to SMEs lead growth in the loan book and expanded 1.7% Q-on-Q reflecting the Bank's consistent focus on these expanding segments. Lending in the middle market increased 1.1% Q-on-Q. In corporate lending, loans increased 25.9% Q-on-Q recurring the levels of 3Q of '11.

As world financial market shows greater stability in the quarter, the Bank took the decision to partially reduce the surplus liquidity accumulated in the second half of '11 by shifting assets from short term Central Bank deposit into large corporate loans that are low risk and offer a high yield in alternative. We expect loan growth rates to continue to accelerate in the remainder of the year, especially retail lending as was the case in the month of March.

As a result of our improved asset and funding mix, coupled with a stable interest rate environment, positive levels of inflations and higher loan spread, the Bank's net interest income reached a record high level of CLP266 billion in the quarter and the Bank's net interest margin reached 5.3%.

For the rest of 2012, the evolution of margins will depend upon various factors. On the one hand the Bank will continue to improve it asset and liability mix. Loan growth in individuals and SMEs is expected to accelerate in the remaining of the year. Funding cost should continue to stabilize or eventually fall in line with the outlook for short term interest rates and the growth of our core deposit base.

On the other hand, the uncertain evolution of inflation and the negative effect of possible regulations regarding maximum rate that can be charged on loans may have a negative impact on margins. Provisions for loan losses in the quarter decreased 9.6% Q on Q. This reduction was mainly due to a lower level of charge-offs. Total charge-off decreased 12.9% Q-on-Q with commercial loan charge-off following 28.7% and consumer loan charge-offs decreasing 5.7% Q-on-Q.

Asset quality was stable in the quarter. The Bank's non-performing loans ratio decreased from 2.95% in 4Q '11 to 2.92% in first Q of 12. The covered ratio of total non-performing loans reached a 100.7% as of March 31, 2012.

The risk index, which measures the percentage of loans for which the Bank must set aside loan loss allowances based on our internal models and the Superintendency of Banks' guidelines was 2.94% in first Q '12 compared to 3% in 4Q '11. Going forward provision levels measure as the cost of credit or provision expense over total loans should continue to normalize following the conclusion of the upgrading of the Bank's main provision model and the positive economic outlook.

The income growth continues to recover as retail lending activities rebounce. These trends should gather momentum throughout the rest of the year. Net fee income was up 0.4% Q-on-Q. The Bank's client base, especially cross-sold clients also continued to grow at the solid pace. The amount of cross-sold clients increased 8.8% year-on-year in March '12. Credit, debit and ATM cards increased 5.2% Q-on-Q and the Bank's client base and cross-selling standards continued to improve.

Asset margin fees increased 12% Q-on-Q driven by the recovery of equity market that drove the growth of our asset management business. New regulations regarding mortgage loans insurance brokerage were published by the superintendency on banks in the first Q of '12. That will be in effect in the second Q of '12.

In summary, banks will be obligated to auction and offer to all clients a low-cost mandatory residential mortgage insurance, which while still been allowed to offer other insurance options with better coverage if the client declines the low-cost option. The impact of this measure has been calculated, but our initial estimates for loan collection related fees could be between $10 million and $20 million in 2013.

An important driver for Q3 improvement in cross-selling standards and productivity is the new client relationship management system implemented by the Bank. The Bank is investing heavily in this project. A final program has been installed for 400 commercial executives. So far preliminary results have been highly encouraging; (inaudible) productivity is nine times greater, client satisfaction is higher, marketing intelligence is more effectively used measured by the percentage of sales that are pre-approved over the total and the cost of credit is lowers.

We are still at 40% completion of this project. In line with our last strategic focus, the Bank's efficiency ratio also improved Q-on-Q as the growth rate of cost began to decelerate. The efficiency ratio improved in the quarter to 36.8%. The Q-on-Q decrease in operating expenses is mainly seasonal, especially personal expenses which in the first quarter include the reversal of paid personnel application expenses due to the holiday season.

Personnel expenses increased 10.5% year-on-year as headcount increase 4.1% and high variable compensation as the Bank increased its business activity in the quarter. Administrative expenses increased 11.6% year-on-year as the Bank continued with its project on investing in the new CRM system as it's already told, another IT project to enhance productivity in future period as described in the previous slide.

In summary, first Q '12 result reflected Bank's return to a more optimistic approach about the external financial conditions and general Chilean market outlook. While we recognize that there would still be market volatility coming from abroad, we are more optimistic on the outlook of the Chilean economy where a 100% of our business is done.

Our effort in 2011 in improving our core capital level improving our funding needs, controlling our cost of funds, investing significantly in technology to increasing spread and enforcing more prudent credit risk standards apparently are paying off as our result in the first 2012 shows. For these reasons, going forward, we are prudently optimistic about the outlook for the Bank and we believe it should be capable of sustaining high levels of profitability going forward. At this time we will gladly answer any questions you might have.

(Operator Instructions) Daniel Abut, Citi.

Just picking up on the last slide that you highlighted the efficiency ratio has been improving 37%, close to 37% in the last quarter. Before you made the changes to go more defensive stand in the second half of last year, you had even had a quite a few quarters of efficiency level even below that. Do you think we could be trending back to those levels? There were some points where you even in the low or mid 30s, although you think that the 37% is probably, at least for a foreseeable future, as good as it's going to get.

And I recognize that there are some difficulty for you in answering this question because there's still some uncertainties around what a sustainable level of margin will be as you correctly indicate in your remarks. But I want to get a sense if this is something you control, which is more the cost side, you see further improvements possible in the cost-income ratio?

Yes, thank you for your question. And it's true that the cost income being a ratio is sometimes is difficult to predict. But we think that with the new, implementation of our new career growth models plus the new CRM platform, we have space for improving our productivity. It's simply that people believe that reducing cost income is a matter of flashing cost or getting rid of people and that is not the case. In our case we have increase in our headcount, but what we are trying to do is getting better tools for the commercial teams to do their job.

And that's why when the implementation is fully completed by early 2013 or mid 2013, we think that we could be approaching a level of between 35% and 37% cost-income ratio which is our medium term goals. However, from then downwards we think it could be better not to focus on bringing that ratio lower and lower because you tend to choke the growth of businesses. So we think we have room for lowering our cost income ratio to something close to 35 up to 37% on a kind of sustainable basis.

And from then on you simply focus on growth and how to increase your relationship with clients because if you try to bring, at least in our experience, efficiency levels lower and lower, you tend to choke in the margin growth. And that's why cost income is important to bring it down, but only when you have it at a high level. From then on it's better to be prudent and try to foster growth and improve the gains.

Just a follow up to that Raimundo then. If the cost income ratio will stay 37%, probably go down to 35% and stay in that range, depending on what, what do you do with your capital. You mentioned that if you adjust the ROE of the last quarter by the dividend paid you get (inaudible) at 25% level, do you see room to improve above the 25% level?

Will you improve the leverage, which you indicated is one of the things that have been deterring from the ROE, that the ROE could be at 30% already. If you are working with the leverage of your peers, is that a card that you could play going forward increasing the leverage so that the ROE could go back to the high 20s we had not so long ago or 25% is a better target?

No, I would say that we have some homework that we've been doing especially in evaluating risk and efficiency. But as we have mentioned in the call, there are also uncertainties at the regulatory front. These have been scrutinized by consumers and authorities. So, well, and that at the same time there are some discussions about margins and about maximum rates et cetera. So today we still maintain our medium term goal of ROEs of around 25% after sustainable goals again as long as the economy manages to grow at around 5%, 5.5%.

So it's going from then upward it's difficult to predict at this time, but no doubt that we have strong job market and with the Bank improving, the way we handle our relationship, given that we are mostly a retail bank, we can sustain ROEs in the mid 20s even though we expect some negative regulation coming on.

At the same time, to be fair, there are good news and bad news in terms of regulation. The other regulations are also under discussion that will be supported for consumers and therefore will be good for us, especially the integration of the credit bureau, to have a single credit bureau is also under discussion, will be positive for consumers and therefore for banks and non-banks as well.

So there are uncertainties and that's why we think it's achievable to have 25% ROE or something around that. From then higher is more and more uncertain.

Thank you, Raimundo.

Tito Labarta, Deutsche Bank.

Just a couple of questions, more in terms of loan growth you could see some pick up in the quarter. But given the defensive stance you took last year, just want to get a sense of how you think this year will evolve the first quarter growth is more in line with the system? Do you think that trend will continue? Do you think maybe you can capture some market share again this year?

So I just want to get a sense of your expectations for loan growth this year. And then also on the back of that how -- you said you have focused on kind of more profitable loans, but do you think there could be some more margin expansion through the year given a more focus on retail or how you think the net interest margin will be impacted given the loan growth in the different segments. Thanks.

Okay, well, in terms of loan growth, when we started the year we saw much more favorable conditions and we saw a similar outlook for international bank (inaudible). That's why we cannot get rid of our more prudent mood that we saw in the second half of last year, and that's why we've been starting to grow, we've been reducing our liquidity pool et cetera simply because we think that the problems, especially in the eurozone, are starting to be tackled and countries are doing their homework.

Yes, and that's why that's good for the season et cetera. And that's why we have been more active in growth. Of course, that takes time. It's easier to grow in the corporate side than in the retail side, but March figures are quite encouraging in terms of our growth in the retail part. And although are not published in April, so we saw strong demand for growth in the retail part.

And that's why we think that not sure whether in 2Q or -- but with the let-out in second half we should be growing in-line the market that is around 11%, 12%, 13% for the total loan book. And in terms of specific products, especially SMEs lending and lending in terms of credit card et cetera probably outpacing the growth of the market. But again, it will be done taking into consideration our more stricter credit models and at the same time taking into consideration that we don't want to grow in low yielding activities as it has never been the case.

In the first Q, we simply switched zero yielding government or Central Bank notes for high yielding corporate lending. But it's simply a way to get some extra money out of your excess cash pool. So it's not a permanent way to growing the Bank.

Of course, in the -- so net-net we think that probably we expect growing in the loan book in line with the market probably throughout the rest of 2012, not sure whether we will be gaining market share in second Q. But probably by the end of the year, once the full commercial machinery is back in full throttle, we will be able to gain market share, especially in SMEs and some part of the consumer business.

And -- sorry, and in terms of net interest margin, as we stated in the call, there are good news and bad news. Dearly speaking, we think that margins will be able to maintain at the 5.2%, 5.3%, which is a little bit higher than the historical levels, but that comes mostly from the mix effect and the high inflation that we foresee this year as compared to what we're expecting at the beginning of the year.

But there would be short term noises in inflation because of some tax reforms that the government has been -- is in the process of enacting that will eliminate some taxes and will eliminate -- will support the price of gasoline et cetera for some time. So we will see noises on the inflation.

And then in terms of regulation, the caps on rate, although is not certain when it will be applicable will have a dent in our margin. And that's why we think that maintaining margins in 5.2%, 5.3% is a good bet for the rest of the year. On a quarter-over-over basis, of course, it will depend on short term changes of inflation as usual. But the kind of trailing, fourth quarter trailing basis, we expect margins to be in the 5.2%, 5.3% range.

Great, thank you very much, Raimundo.

Fabio Zagatti, Barclays.

I've just a couple of follow-ups on the regulatory front. You just mentioned interest rate caps. Can you please share with us what are the latest developments on that front?

And then I have another question related to positive credit bureau. We are hearing from retailers that the recent developments on that front in Congress are actually positive from their perspective in the sense that apparently the positive credit bureau, there has been a new proposal from one of those senators involving a discussion which would set a limit for loans to be included in the positive credit bureau. If -- I would really appreciate if you could share your thought related to that, thanks.

Okay, well, these changes in good relation, of course, were accelerated by the (inaudible) affair by May 2011. And that's why in the beginning the government was rushing things. And, of course, it's a very technical issue and every interested party is trying to bring all the ideas and all the concerns that they might have because that actually these two projects are -- could be neutralizing each other.

If you have more information about a client, a better information about clients, of course, you could price your products more thinly and therefore more people could be -- or we could be operating with more people even though the maximum rates are lower. And that's why the technicalities are very cumbersome and the two projects are taking more time.

At the end of our approach which has been the same that the banking industry has been for many years following is that whatever is good for clients should be good for banks. And then our position is that having better information about clients will result in lower prices, which has been historically the case.

So it's uncertain the timing, and it's uncertain the final regulation that will be enacted, but we do hope that the technical teams in Congress and the political parties will take into consideration that having better information about clients will be the permanent way to give better terms to clients. The rest is simply an act of will that probably will be not fully sustainable through time.

So we expect the two regulations to be brought together, and hopefully we will have relatively little impact because you will be having better information about clients and at the same time be willing to charge less for those good clients, which is the majority. Simply that when you don't have full information, well, you have an incomplete view of the client.

The average client in Chile according to Central Bank figure is relatively in a low leverage. The total debt burden is around 60% -- sorry, 35% of GDP is the mortgage plan commercial lending and therefore to service debt is around 12% which is relatively of salary, which is relatively low.

But the problem is that on the margin you don't know whether you are dealing with a client that is over leverage or not. The average is sound, but the specific clients that you have in front, you don't know whether it has zero debt or very high leverage. And that's why we hope that the project, the new projects will come together and definitely that should be good news for clients and accordingly good news for banks and non-banks as well.

Thanks for the answer. And I understand that the timing is uncertain for these two measures, positive credit bureau or interest rate caps. But if you had to estimate a timeframe for these two measures to be approved or fully discussed and approved in congress and by regulators, would you expect these two to be still 2012 or more towards 2013?

It's difficult to know because, for example, in terms of the discussion of the single credit bureau, the government took the priority for discussion. There are some -- you can qualify the projects of law, then you send it to congress and that determines the speed under which it should be discussed. So that project is losing momentum in the short term.

And then in terms of the maximum rate, there have been very different positions coming from different parties and different actors. And that's why the bans of the negotiations are wide open today, and that's why it is difficult to know because I am not -- and actually the time is about congress. But our guess is that if at all it would be enacted probably end of second half or if not in 2013, but again don't quote me because not our subject.

Okay. And sorry to reinforce this, but do you think that the discussion related to these measures has lost some momentum in the short term or do you think that discussions continues to be exactly as they were like months ago?

Whatever it is, but both have high technical considerations to be taken into account. And therefore at the beginning probably the actors thought that it would be very straightforward because it was good to bring the rates down. And then they started realizing that there are tradeoffs to be taken into account. The lower you get into the prices, the more people you get out of the formal market. And that is very relevant for SMEs and the lower parts and consumer part.

In terms of the integrations of credit data, also there are tradeoff to bear in mind in terms of consumer protection, in terms of people handling private information about client. So that's why this is a project that convey a lot of technicalities and a lot of tradeoffs that probably the impression at the beginning, if you are not in the discussion, you think it's very straightforward, you think, okay, lower the rate and we are all happy, but then when we go into the nitty-gritty you realize that there are tradeoffs to be faced. And probably those are the tradeoffs that today are making the discussion to be more slowly but probably the outcome would be sounder.

Chris Delgado, JP Morgan.

Just one quick question kind of going back to MPL, I just want to get an idea. You guys kind of -- you kind of mentioned the improving economic environment. I just wanted to see if you just kind of see that just stabilizing levels right now or kind of declining by year end. I just kind of want to get your thoughts on that.

Okay. Well, we think that generally speaking there are two forces here, one is supportive of improved nonperforming loans that is the good macro outlook and a very solid job market. Today most economists agree that we are kind of close to full employment, yes. And therefore that is good news. Salaries also had been growing a couple of points ahead of inflation, meaning that the real wage pool have been increasing faster than inflation. Yes, that is good news for non-performing loans, especially in the lower end of the consumer market.

So that should be supportive and good for our non-performing loan. However, given that respect to grow faster in the more retail and in the SMEs than in the more larger companies and the higher part of the consumer pyramid, that is a counterbalancing force. So we think that after the peak that we saw in 3Q of last year when we changed our renegotiations policies especially in the lower end of the consumer market, which has resulted in a short term increasing non-performing levels, we will see a probably non-performing levels bottoming by second or third Q and then growing in line with loans and therefore maintaining the ratio at around 2.7%, 2.6% something close to historical levels that we have seen.

And something similar happening in the what we call the cost of credit, which is basically provisions over total loans, which historically has been between 1.6%, 1.7%. Today we are close to 1.9 something like that. The idea is to go back to 1.6%, 1.7% not sure whether in 2Q or 3Q. And from then on maintaining because we don't see any fundamental for asset quality to deteriorate except for the mix which will be more retail as we have addressed before.

Okay, great.

And there are no further questions. I would now like to turn the call back over for closing comments.

Okay. Well, thank you all very much for taking the time to participate in today's call. We look forward to speaking with you again soon. Have a good day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.